Re: IMCU questions

[Paul Davidson <pdavidson@xxxxxxx>]

At 09:01 AM 6/11/02 -0700, you wrote:


> >
> > The IMCU does not guarantee that politicians will not legislate foolish
> > policies to increase aggregate savings sufficiently to lead to a lack of
> > effective demand.  What the IMCU does is provide
> > "intelligent"  expansionary policy advocates with an environment where no
> > one can use the balance of payments statistics to argue against such
> > expansionary spending policies and for incentives to increase savings
> > BEFORE full employment domestically is achieved.
>
> ok, but that's like making instuting a program to keep people who believe
> the earth is flat from stopping those who want to sail out there.  And as a
> by product concedes heaps to the flat earth believers.


Not quite. It also permits policy makers to follow expansionary policies
(via monetary policy and government policies to expand -- with the
cooperation of private enterprise-- the capital stock of the economy)
without having to worry about a balance of payments constraint   -- a
constraint that occurs whether countries have fixed or flexible exchange
rates.  (Even if the exchange rate is flexible, the foreign exchange market
must be ORDERLY -- and orderliness requires a market maker institution --)
Ity does not conced anything to the flat earthers-- but the system of free
market exchange rates concedes STRONG power to control  and constrain
expansionary governmental policies -- whether they be the expansionary
monetary and fiscal policies
> suggested above or even an ELR policy (which can crerate a balance of
> pasyments constraint under free market rules.)



> > >2.  Since each nation maintains its own central bank, member governments
> > >are not 'credit sensitive' in their own currency.
>
> Sorry, by 'credit sensitive' I mean that local currency govt expenditure is
> not 'credit constrained.'
> It means 'sensitive to credit quality' which only govt in its own local
> currency is not.


OK

> >
> > Are you pulling my leg Warren?  Under current international relations, if
> a
> > nation lowers interest rates below say that in the G7 in order to
> encourage
> > private sector borrowing, then there is an incentive to borrow
> domestically
> > , convert the domestic money into say US dollars to be lent abroad at the
> > dollar interest rate and profit on the interest rate differential.  If
> > enough people do this, there is  capital flight -- with all the attendant
> > depressionary dislocations .
>
> Floating
> exchange rate examples include the extreme case of Japan, where even 0 rates
> for
> about 10 years haven't weakened the currency via 'currency flight' as you
> call it.

Since when has Japan had a floating exchange rate when the Bank of Japan
intervenes to prevent the yen from declining to 140 by actively selling
dollars --- as the US applies pressure to prevent the yen from falling?
Also you forgot to note my qualifing phrase: "If enough people do
this".  "Enough people" have apparently learned by observing the Bank of
Japan that if the yen starts to move rapidly, the Bank of Japan will
actively intervene .


> >
> > >  Is it therefore not to their benefit to not only deficit spend in their
> > > own currency to maintain
> > >domestic full employment but additionally to
> > >import as much as possible via additional deficit spending of their own
> > >currency?
> >


But you forget the hold that the quantity theory of money has on both the
public and the policy makers' minds. And if they forget, the medias can
always print the pictures from the Great German Inflation of 1922-23, where
Germans used wheel barrels full of currency to shop at the retail market,
as  the German government printed its own currency and spent freely!!
And we all know one picture is worth a thousand words!

> >
> > Again this is where we differ. You see no problem in servicing
> > international debts growing out of the need to finance the import surplus
> > in either US dollars (for homogeneous commodities, e.g., agriculture,
> > minerals, that are traded in dollars in international markets) or in the
> > currency of the exporting nation ( in terms of most branded goods).  Being
> > able to print your own currency (or expand domestic bank credit)  does not
> > help you service growing international debt -- unless you are the US and
> > can "print" US dollars.
>
> But isn't it the case with IMCU that a country can use its domestic
> currency to import???  Is that prohibited?


Yes -- if you look at my IMCU proviso  #2-- there is only one-way
convertibility from the IMCU to a domestic currency.  Hence if a country
wants to import from a foreigner it must possess IMCU's that they can
convert into the foreigner's money to purchase the foreigner's goods for
import.  (You cannot buy from a foreigner unl;ess you have IMCUs. That is
an essential element of my plan



> I see a problem of servicing  international debts
> > denominated in foreign currencies -- which an exchange rate decline merely
> > exacerbates
>
> Me too.  I only advocate govts use local currency when they transact.

But they cannot buy imports with domestic currency under the IMCU plan-- so
the exporting country is not being "cheated" as you tend to suggest, while
the importer gets something for nothing.



> >
> >
> > >   That is, purchase as many imcu's from the CB (which will go into
> > > overdraft as per clause #5) as possible and spend them on imports?

Under my proviso #5  short-term overdrafts are only available when the pro
bono managers of the clearing agency know that the borrowing nation will
receive a surplus of IMCU from selling its exports in the near future
(e.g., if exports consist of seasonal crops, etc.)
\As the following quote from your email indicates-- I have already made
these comments to you regarding one-way convertibility and short-term
overdrafts but you apparently have not understood my argument.

> >
> > If you read my IMCU proviso#2 you will see that there is only
> > one-way  guaranteed convertibility -- any central bank who holds IMCUs att
> > the clearing union can always convert them into any nation's domestic
> > money. BUT a nation's central bank  does NOT have the option of printing
> > domestic money and convert it to IMCU  as they wish.
> >
> >    Proviso #5 permits  "short-term overdrafts" when a nation requires such
> > credits to smooth out SEASONAL export- import flow payments  --and then
> > this seasonality will require the pro bono publico managers of the
> clearing
> > house to provide approval.  Thus, for example, if a nation produces some
> > agricultural crops as its major exports, it will be flush with IMCUs after
> > the harvest and sale of its crops --
>
> ok, but it must have gotten them from other members who bot them with their
> own individual local currencies?

No-- see my one-way convertiblity comments.

>  but may find itself , the months
> > before harvest, short of IMCUs  necessary for normal import flows (say of
> > manufactured goods that have little seasonality patterns). This is when
> the
> > SHORT-TERM overdrafts of proviso #5 come into play.
> >
> > Clearly, you can not use the overdrafts to increase spending on imports ad
> > in finitum as you implicitly suggest.
>
> The incentive is there to try to do this.

No not if the pro bono managers know their jobs -- and the criteria for
proviso #5 is explicitly spelled out.


> >
> >
> > >3.  Doesn't forcing creditor nations to spend imcu's in nations with
> > >overdrafts actually, in real terms, help the creditor nations at the
> > >expense of debtor nations?
> >
> > No it helps the debtor AND the creditor nation -- for the debtor nation
> can
> > enjoy full employment without having to service excessive (real income
> > reducing) international debts.  (Or are you denying that servicing debts
> > denominated in foreign currencies is a "real" cost to a nation?)
>
> With a floating exchange rate the 'debtor' can get back to full employment
> immediately
> via fiscal policy, whether traditional expansionary policy or elr type of
> policy- it can
> restore agg demand internally, without needed to export.

No they can't as the balance of payments constraint comes into play and the
Marshall-Lerner condition indicates that a falling exchange rate will NOT
improve the balance of payment deficits.


> Just because they
> don't isn't
> the point here.


It is not a question of  they don't because they are stupid or obstinate--
it is because under the existing system, or any system of fixed or flexible
exchange rates in a free market, the Marshall Lerner condition will prevent
flexibility from avoidinbg the balance of payments constraint -- except in
the long-run when we will all be dead. Even orthodox mainstream economists
recognize this Marshall-Lerner condition problem when they suggest that the
J-curve will result from a falling exchange rate-- where the J represents
the  international trade balance as the exchange rate falls.  The downward
part of the J being the immediate  impact on the balance of payments -- and
where the J starts to turn up -- only after a number of years (the
long-run) provided the elasticity of substitution between imports and
exports becomes sufficiently high to overcome fixed distributional costs, etc.

>  I agree there is questionable policy response in the world
> today.
>
>
> >
> >
> > >4.  Since domestic deficit spending is unlimited and can be used for
> > >domestic full employment
> > >by each member nation, why would they not attain full employment that way
> > >regardless of imports.
> >
> > The problems of (1) servicing foreign debts,
>
> Govts need not have any external debt.  those that already do can simply
> ignore it.  It's unsecured/non recourse.

Yes if a nation is willing to be a completely closed economy  and adopt
autarky -- but then what happens tothe standard of living, technical
progress, etc-- Remember Albania and its standard of living before the fall
of the Berlin Wall --


> (2) preventing capital
> > flight,
>
> You are concerned with full employment causing currency depreciation???
>
> With floating fx there is no loss of fx reserves, of course.

As long as there is a need to maintain an orderly foreign exchange market
there must be a market maker who will have to lose foreign exchange
reserves in order to maintain orderliness in the face of otherwise
disorderly rapid falling of flexible exchange exchange rates.  In my debate
with Milton Friedman  noted that the exchange rate can be perfectly
flexible as the exchange rate remained "stable".  I think your argument
requires a similar tortured logic!

> and(3) under the current system, tightening one's belt to get IMF
> > and World Bank loans when foreign creditors begin to fear that the
> nation's
> > debt obligations will not be able to be serviced in the future --- e.g.,
> > currently Argentina.
>
> another poor policy response.  Argentina should imply ignore its external $
> debt,
> not even answer the IMF/World bank phone when it rings, and immediately
> restore full employment with its domestic currency.  I'd start with an elr
> and then
> make fiscal adjustments to minimize the elr pool and 'feed' the private
> sector.

OK. -- but then who will do international business with Argentinian
importers? Would the Us even allow the Argentinian airlines to land in the
US -- without grabbing the planes to be held by the US "creditors" of
Argentina as collateral agains the defaulted debts?


> >
> >
> > Can we agree that those nations (with the US a possible exception) that
> run
> > persistent import surpluses must incur international debts denominated in
> > other than their own currency -- and that these debts MUST be serviced??
>
> No, they can follow the US model and not let their govt's engage in external
> currency
> financing.

Alright.  We agree to disagree.


Paul
Paul Davidson
Editor, Journal of Post Keynesian Economics
Economics Department - 523 SMC
University of Tennessee
Knoxville, Tennessee 37996-0550
phone # (865) 974-4221
fax # (865) 974-1686
home phone  (865) 692-0802
http://econ.bus.utk.edu/Davidson.html